Confirming one of Southeast Asia's worst worries, Japanese officials say companies are shutting down factories in Association of Southeast Asian Nations (ASEAN) territory and moving bases of production to China.
"Cheaper labor costs are the big reason behind the move," said Yu Miyake, an official at the Japan External Trade Organization (JETRO) headquarters in Tokyo.
According to the JETRO, a manual laborer in Singapore, where labor costs are the highest in Southeast Asia, gets paid US$421 US a month, five to 10 times the wage in Shenzhen, China.
The wage differential has led many Japanese firms to conclude that reorganization of production bases is necessary to cut overall costs, experts say.
Miyake said China first became a popular investment destination for Japanese firms in 1995, however, "the business condition was still not very good at that time, so some Japanese firms closed their offices in China around 1998."
Japanese investments in China took off again last year on expectations China can serve not only as a production base, but also as an important market.
The entry of large client firms into China such as Toyota Motors and Sony Corp, which offer a market to Japanese suppliers, is also behind the move by Japanese manufacturers into that country, said Miyake.
According to the JETRO, the number of new Japanese overseas investments in China totalled 258 in 1997 worth US$2.0 billion, but dipped to 112 new ventures in 1998 worth US$1.1 billion, only 76 in 1999 worth US$751 million, and started to rise again to 102 in 2000 worth US$995 million.
Last year, 187 new Japanese ventures worth US$1.4 billion started up in China.
Japanese manufacturers began branching out to Southeast Asia in the 1970s, turning the ASEAN region into a key production base.
However, new Japanese investments in Southeast Asia have dropped off since the Asian crisis derailed the once booming region's economies in 1997.
According to JETRO, the number of new Japanese overseas investments into the four leading ASEAN nations -- Indonesia, Malaysia, Thailand and the Philippines -- totalled 144 last year, compared with 470 in 1997.
While many ASEAN countries are still struggling to shake off the 1998-99 recession, which seriously undercut consumer buying power, China's 1.3 billion population and its growing purchasing power, especially on the fast-developing east coast, is a growing attraction.
According to a survey by JETRO, more than 70 percent of Japanese firms recently surveyed cited tapping demand in the local market as their reason for having drawn up plans to invest in China within three years.
China's gain may be ASEAN's loss, in some cases.
Seiko Epson Corp., which has been making scanners in Singapore since 1995, will stop doing so at the end of September, this year, and dismiss 700 workers, said a spokesman at the company in Tokyo.
The Seiko official said production of high-end models will be transferred to its unit to Indonesia, and production of low-end models will be outsourced to a Chinese firm.
NEC Corp will also close a personal computer production base in Malaysia soon, laying-off 230 staff, which "will probably be outsourced to a Chinese firm starting from autumn." said a NEC official.
Aiwa Corp, to be a 100 percent subsidiary of Sony Corp in October, said it closed down its two Indonesian factories and layed off 1,600 workers there. The company also closed down its Malaysian plant last month and dismissed 1,700 people.
Sources in Indonesia have attributed the closures to restructuring after Aiwa was taken over by Sony, rather than a shift of manufacturing to China.
Minolta Co also plans to move assembly of its cameras from Malaysia to China in 2003.
A total of 15 large Japanese companies have so far announced plans to scale down operations in the ASEAN region and shift them to China. The move is expected to result in 17,000 people losing employment.
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